HUARONG MESS FORCES CHINA TO MULL U.S.-STYLE FINANCIAL REFORM

Drama around the future of one of China’s biggest bad-debt managers is highlighting the urgent need for the country to simplify oversight of its financial system as a number of state agencies perform such role, with the scandalous deals and the execution of a key executive at the state-owned China Huarong Asset Management Co. justifying such need, Bloomberg News reported.

There’s the finance ministry, which is the company’s majority shareholder. It may sell its stake to the sovereign wealth fund, thereby transferring responsibility, according to a Bloomberg News report.

The China Banking and Insurance Regulatory Commission (CBIRC) has its say as a top watchdog, but it has limited power over the firm’s financial decisions even as it criticized its management.

The central bank, which is considering taking on some China Huarong assets, is required to step in as part of its mandate to maintain overall stability in theb$54-trillion financial market. Above them, there’s the Financial Stability and Development Committee, chaired by Vice Premier Liu He -- a key adviser to President Xi Jinping. There are signs the influential body will expand its oversight of local financial institutions.

Central bank Deputy Governor Liu Guiping urged reforms in a detailed article in March. China has “scattered” financial rules and could learn from the set-up in the US, which has the Dodd-Frank Act, and other major economies that overhauled their financial regulations in recent decades, he wrote.

Liu’s main takeaway: China needs a coordinated financial stability law. Liu submitted the proposal to the National People’s Congress and suggested introducing the legislation “as soon as possible when conditions are ripe.” Completion of such legislation may take three to five years, according to Yang Zhaoquan, a partner at Beijing Weinuo Law firm.

“Risky incidents have emerged one after another, harming the marketplace and damaging financial and social stability,” said Yang. “This calls urgently for more powerful legal tools.”

For a government obsessed with control, the Communist Party’s oversight of its $54 trillion financial system -- which includes the world’s largest banking industry -- looks disjointed. A lack of oversight allowed companies like China Huarong to dabble in risky businesses and meant that others like Ant Group Co. grew far too influential.

When China started to experiment with market-oriented reforms in the late 1970s, the People’s Bank of China was the only authority responsible for managing and overseeing the financial system.

The country’s rapid integration with the global financial system means a bolder strategy is needed to strengthen its patchwork of rules and regulations.

“China used to be closed off,” said Liu Feng, chief economist at China Galaxy Securities Co. “But now, foreign capital is flowing in and our capital is going out, and that requires our law and regulation to match that of other countries,” Sofia Horta e Costa, Yujing Liu, and Jun Luo also reported for Bloomberg News.

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